I’m an advocate of dividend growth investing as a great strategy to help investors reach an ultimate goal of financial independence.  Building up a portfolio of assets (shares of dividend growth stocks) that pay out an annually increasing amount of passive income (dividends) is one of the greatest ways to reach a point where you no longer have to rely on wage income to cover your living expenses.  If you stick to a well thought out plan, eventually you will have a large enough portfolio that the dividend income you are paid will cover all of your expenses and let you afford to have some fun as well.

Not for Everyone

However, the dividend growth strategy is not for everyone.  These past few days where the S&P 500 has declined a fairly quick 2.6% shaving off hundreds or even thousands of dollars from investors portfolios is a reminder that not everyone can handle dividend growth investing.  Following are some of the reasons I would say you should not be a dividend growth investor:

  • You don’t want to do the proper research.  Dividend growth investing involves purchasing shares in individual companies.  You need to do a proper analysis of each company you want to own to make sure you aren’t paying too high a price or that the company doesn’t have some underlying problems causing a future downfall.  If you don’t have the time or don’t want to do the research, I would suggest sticking with a dollar cost averaging plan investing in low cost index funds.
  • You can’t handle large market swings.  The truth is long term investors need to be able to tolerate large market downturns.  Investors should expect to experience market corrections of at least 20% every few years and even downturns of 50% or more a few times in their investing lifetimes.  If you can’t hold steady to your investing strategy when the market is going down, if you are going to panic and sell your stocks when the market is going down, then I would suggest you should find another strategy for building wealth.  If you can stay strong through market downturns, if you believe a market correction is a buying opportunity rather than time to sell and if you understand that over the long term the market will recover and begin to make new highs once again, then you should be good to go for dividend growth investing.
  • You don’t have the rest of your financial life in order yet.  Do you have high interest debt?  Are you living above your means by spending more than you earn?  If the answers to these questions are yes, then they need to be addressed first.  You should have no high interest debt, have an emergency fund established, live within your means and have proper insurance coverage all before thinking about dividend growth investing.  Get your financial life in order and then start putting as much as you can into dividend growth stocks.
  • You won’t be able to ignore the noise.  Do you watch the news, read the newspapers, read articles online or follow the stock market pundits on CNBC?  When they are shouting doom and gloom will you be able to ignore them and stick to your plan?  To be a dividend growth investor you need to be able to ignore the noise, make your own rational decisions based on your own research and stick to your plan no matter how loud the media is screaming about financial ruin for the world.
  • You want to be a trader.  Dividend growth investing is for the long term.  If you are going to constantly buy and sell stocks after owning them for just a few days, months or even just a couple years then I would suggest you should instead invest in index funds.  Investing for the long run, not market timing by jumping in and out of stocks, is the best way to build wealth.  Dividend growth investors should buy stocks with the expectation of owning them forever.  There are only a few reasons to sell dividend growth stocks.  Otherwise investors should be looking at owning their shares for the long term collecting dividend income along the way.

Let’s face it, some people aren’t cut out to be dividend growth investors.  Either they won’t have the patience, they will panic and sell at the wrong times, they won’t want to do the research required for investing in individual companies, they aren’t financially ready yet or they won’t have the proper discipline to stick with a plan.  If any of these describes you, then I suggest looking for alternative investing strategies.  There are tons of ways to invest your money for the future.  Real Estate, index investing, bonds and many more ways one can try to reach financial independence.  Figure out a strategy best suited to your individual temperament and get started.

What other reasons might dividend growth investing not be for everyone?  Share your thoughts in the comments!

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13 Responses to Dividend Growth Investing is Not for Everyone

  1. I think another reason that people shouldn’t invest in DG stocks, is if they don’t have the patience to stick with the plan. DG investing isn’t a get rich quick strategy. You don’t really see the effects of compounding until about year 10+ which means a long term focus is even more important.

    • Dan Mac says:

      I think you are exactly right JC. Sometimes it’s hard to have the patience to let the plan really begin to work. I think if you aren’t going to be a long term investor, if your going to panic and sell anytime the market slightly corrects, or if you just have a short attention span and will be deciding to try something different without giving the plan a decent shot of starting to work then I think you might as well not bother with the strategy in the first place. Like you said it can take 10+ years before things really start compounding and get exciting. If you’re going to give up before that then maybe you’d be better off sticking with other types of investments.

  2. These are great points. It can be hard to follow the market and keep up to date with each individual stock you own and at the same time stay focused on the long term and ignore short term signals. Like you said its not for everyone and its best to figure that out early.

    • Dan Mac says:

      Thanks Zach! I think it’s a great strategy but it’s definately not a lazy man’s strategy. There is some research involved.

      I think the biggest reason people may be better off looking at other investing strategies though is if they can’t stick to it long term. My biggest pet peave is when people panic and sell at exactly the wrong time. If the market is going down, it offers great buying opportunities. If you are going to panic, rather than seeing an opportunity, then you will most definately be better off investing in some other type of asset. Possibly real estate since you don’t get daily price quotes.

  3. Integrator says:

    Some good points above. I’d actually argue that dividend growth investing helps you ignore the noise and the large market swings because you have an underlying income stream thats coming from the stock. I haven’t taken much if any action on some of my larger paying dividend stocks even though they’ve occasionally been buffeted around by market forces, precisely because I’m being paid to hold and wait for the market to return to its senses.

    • Dan Mac says:

      I agree Integrator. For me I know it is all about the income stream and as long as that is safe I’m not worried about market corrections or swings. However, there are many people that aren’t that way and may say they want the income but when the price drops say 15% they are thinking hard about selling. Those types of people maybe are better off not investing in dividend growth stocks.

  4. Fantastic points that ring true! I would venture to say if you don’t want to conduct the research and cannot control your emotions then you have no business in the market.

    • Dan Mac says:

      True Marvin, I think for people that don’t want to do the proper research, a strategy of dollar cost averaging into index funds for the long term is a good idea. For those that can’t control emotions and will react to any market swings, I’m not really sure what would be best.

  5. Hey Dan!

    I would also add: “if you are not patient, do not invest in dividend growth stocks”. The power of this strategy is to hold a stock “forever” and benefit from the compound growth of the dividend.

    I’ve switched to dividend investing a few years ago because I didn’t have enough time to trade monthly as I used too. I think it’s a great compromise for investors who like trading but can’t do it on a regular basis.

    • Dan Mac says:

      Patience is definately key! I can hardly wait for the compounding effect to really benefit my portfolio. Unfortunately I have quite a few years to wait but I am patient and will stick it out.

      I agree that the strategy is a good compromise. I think you need to do your research when initially buying stock of a company. However, once you are in that position it is pretty much buy and monitor. The monitoring doesn’t take that much effort other than staying up on the news and reviewing new financials as they come out.

      Thanks for the comment Dividend Guy!

  6. [...] Growth Stock Investing discusses why dividend investing is not for everyone. I actually believe that everyone can benefit from dividend investing, however for certain people [...]

  7. Really solid points! The only other thing I would add is “if you are a doubter”. There seem to be a lot of people out there just waiting for dividend stocks to pop as if they have formed a type of bubble. Unfortunately I don’t think they realize that if any bubble pops, dividend stocks will likely be one of the better places to have your money parked.

    • Dan Mac says:

      Agreed My Money Design. There are quite a few doubters and haters of dividend growth investing. People like to talk about a dividend stock bubble and how we will get burned. But that just shows that they don’t understand the dividend growth strategy. We are long term investors and a decrease in stock prices will merely give us a better buying opportunity. As long as our companies continue to pay out dividends then they are doing their job and I will want to add more shares to my portfolio. Also if there is a stock market decline, I feel the dividend yield will offer a floor to how low the dividend stock prices will fall. Eventually yields will get too high on some amazing companies where investors will swoop in and become buyers, thus not letting the price fall anymore. And while the price may be down a bit, we can relax knowing we are still collecting our dividends.

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